Philip Joos

International Earnings Comparability

We investigate the comparability of accounting earnings for 14 EU countries in the period 1990-2005. Although prior studies have documented international differences in financial reporting properties, there is hardly any large-scale international evidence on the underlying fundamentals driving these differences. The European Union is a particularly interesting setting to study because of the substantial efforts to create a single economic market across countries. We focus on the accruals - cash flow association as in Ball and Shivakumar (2005; 2006) and show that accruals measurement is substantially affected by the business cycle stage and firm specific reporting incentives. Incentives arise from the equity capital market, debt financing and labor markets. These incentives are further intensified by the design of a countrys institutional framework, such as stock market development, importance of bank financing and labor union membership. In addition, our results suggest that the mandatory introduction of IFRS in 2005 did not instantly bring about the expected improvement in earnings comparability across Europe. Our results provide important insights for the ongoing debate on standards versus incentives.

Earnings and Equity Valuation in the Biotech Industry: Theory and Evidence

This study examines how the price-earnings relation varies with the uncertainty about and the quality of a firms investments. We develop a real option valuation framework to capture optimal investment and abandonment options in a research-intensive emerging technology, the biotechnology industry. Both management and investors resolve uncertainty about the firm quality over the life cycle from observing past investment successes and failures. We predict that the price-earnings relation is V-shaped and changes over the firm life cycle. Also, as investors learn about the quality of the firm over time, they will value accounting losses and profits more in higher quality firms. Our empirical findings are based on a sample of 301 biotechnology firms with an IPO between 1980 and 2000, and are generally consistent with our predictions. We contribute in several ways to the existing price-earnings literature. First, we provide a theoretical framework for the significant negative price-earnings relation for loss firms. Second, we show how the price-earnings relation changes over time as investors learn about the quality of the firm. Third, we provide a real option valuation model that is better suited for valuing option-intensive firms than the more traditional DCF based models. In addition, we show how nonfinancial information affects the pricing of earnings.

Determinants and Valuation Implications of Compulsory Stock Option Disclosures in a Weak Regulatory Setting—The Case of France

Using a sample of listed French firms in 2005, the year of mandatory IFRS adoption in the European Union (EU), we investigate the determinants of disclosure compliance of stock option expenses under IFRS 2, Share-based Payment. Stock options are a popular means of executive compensation in France relative to other EU countries. Prior to 2005, French accounting standards and corporate governance regulations did not require recognition of option expense amounts and required minimal supplementary disclosures. There was also a perception that enforcement was imperfect, in particular with respect to IFRS 2. Given this setting, we explore what factors influence the willingness of firms to follow compulsory IFRS requirements in a weak regulatory setting. We find that overall compliance with IFRS 2 disclosure requirements increases with U.S. and U.K. institutional ownership, U.S. cross-listing, provision of English language statements, and decreases with CEO and family ownership of the firm. We also investigate how stock market prices are affected by the recognition and disclosure of stock option expenses according to IFRS 2 in this regulatory setting and find that investors value option expenses positively, particularly when accompanied by high-disclosure compliance. Our findings have implications for other jurisdictions in the process of adopting or converging to IFRS.

A Tale of two Bubbles: A Preliminary Look at the US Internet and Biotechnology Bubbles

The term speculative bubble refers to a situation where prices diverge from their so-called “fundamental values” due to investor optimism rather than anything intrinsic to the values of the underlying assets themselves.1 Economic historians have documented that one of the hallmarks of a speculative bubble is “new era” thinking, or the belief that some new price-enhancing circumstance is present in the world that somehow justifies a permanently higher level of valuation (e.g., Galbraith (1993); Shiller (2000)). Despite the world’s long history of speculative bubbles (see, e.g., Kindleberger (2000) or Garber (2001) for a detailed historical perspective), Welch (2001) recently identified stock market “frenzies” such as the most recent US Internet stock bubble as one of the top 10 challenges yet to be addressed by empirical financial research. Technology market observers and casual empiricists such as Perkins and Perkins (1999) have remarked that the Internet stock bubble has numerous parallels with the US biotechnology bubble that preceded it by less than a decade. Consistent with the “new era” thinking associated with other past speculative manias, for example, both the biotechnology and Internet stock bubbles were characterized by a belief that the new technology underlying these then-nascent stage industries would be revolutionary in their impact on the human condition. What seems most surprising is that investors in US technology stocks did not appear to learn from the biotech bubble and we thereby witnessed a similar, albeit more extreme, cycle of upward and ultimately downward price spirals when the Internet industry emerged less than a decade later.